Josit Ltd. initiated a one-person pension plan in January 2009 that promises the employee a pension on

Question:

Josit Ltd. initiated a one-person pension plan in January 2009 that promises the employee a pension on retirement according to the following formula: pension benefit = 2.5% of final salary per year of service after the plan initiation. The employee began employment with Josit early in 2006 at age 33, and expects to retire at the end of 2032, the year in which he turns 60. His life expectancy at that time is 21 years.

Assume that this employee earned an annual salary of $40,000 when he joined Josit, that his salary was expected to increase at a rate of 4% per year, and that this remains a reasonable assumption to date. Josit considers a discount rate of 6% to be appropriate.

Instructions

(a) What is the employee's expected final salary?

(b) What amount of current service cost should Josit recognize in 2014 relative to this plan?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...